79. Loans to participants

Statement of Requirement: IRC 72(p), IRC 401(a)(13), IRC 412(e)(3)(F), IRC 4975(d)(1), IRC 4975(f)(6), IRc 417(f)(5); Treas. Reg. 1.72(p)-1 and 1.401(a)-20, Q&A-24; DOL Reg. 2550.408(b)-1; Rev. Proc. 96-49; Notice 2001-57

Document Provision: _____

(Note to reviewer: A plan may provide for loans to participants or beneficiaries if it complies with the requirements of IRC 4975(d)(1).)

Sample Plan Language:

(1) Loans shall be made available to all participants and beneficiaries on a reasonably equivalent basis. Notwithstanding the preceding sentence, if this plan is a fully insured section 412(e)(3) plan, no loans shall be made under this plan.

(2) Loans shall not be made available to highly compensated employees (as defined in section _____ of the plan) in an amount greater than the amount made available to other employees.

(Note to reviewer: The blank should be filled in with the plan section number corresponding to LRM #11.)

(3) Loans must be adequately secured and bear a reasonable interest rate.

(4) No participant loan shall exceed the present value of the participant's vested accrued benefit. However, if the participant is an affected employee under the pre-termination restrictions in section _____ of the plan, the total of all the affected employee's outstanding loans will not exceed the amount that such affected employee would be entitled to under the pre-termination restrictions.

(Note to reviewer: The blank should be filled in with the section number of the plan corresponding to LRM #57.)

(5) A participant must obtain the consent of his or her spouse, if any, to use of the accrued benefit as security for the loan. Spousal consent shall be obtained no earlier than the beginning of the 180-day period that ends on the date on which the loan is to be so secured. The consent must be in writing, must acknowledge the effect of the loan, and must be witnessed by a plan representative or notary public. Such consent shall thereafter be binding with respect to the consenting spouse or any subsequent spouse with respect to that loan. A new consent shall be required if the accrued benefit is used for renegotiation, extension, renewal, or other revision of the loan.

(Note to reviewer: Treas. Reg. 1.401(a)-21(d) sets forth special rules relating to the use of

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an electronic medium to make a participant election. Signatures obtained using remote witnessing are deemed to satisfy the physical presence requirement if the plan representative or notary public witnessing the signature follow the prescribed rules, including applicable state laws.)

(6) In the event of default, foreclosure on the note and attachment of security will not occur until a distributable event occurs in the plan.

(7) Loan repayments will be suspended under this plan as permitted under IRC 414(u)(4).

If a valid spousal consent has been obtained in accordance with (5), then, notwithstanding any other provision of this plan, the portion of the participant's vested accrued benefit used as a security interest held by the plan by reason of a loan outstanding to the participant shall be taken into account for purposes of determining the amount of the accrued benefit payable at the time of death or distribution, but only if the reduction is used as repayment of the loan. If less than 100% of the participant's vested accrued benefit (determined without regard to the preceding sentence) is payable to the surviving spouse, then the accrued benefit shall be adjusted by first reducing the vested accrued benefit by the amount of the security used as repayment of the loan, and then determining the benefit payable to the surviving spouse.

(Note to reviewer: IRC 72(p) provides that certain plan loans are treated as distributions. Compliance with IRC 72(p) is not required for plan qualification. Therefore, any plan provision dealing with IRC 72(p) will not be considered with respect to the issuance of a favorable opinion letter. In order to assist Providers in drafting provisions to comply with IRC 72(p), the following language is provided.)

Sample Plan Language:

No loan to any participant or beneficiary can be made to the extent that such loan when added to the outstanding balance of all other loans to the participant or beneficiary would exceed the lesser of (a) $50,000 reduced by the excess (if any) of the highest outstanding balance of loans during the 1-year period ending on the day before the loan is made, over the outstanding balance of loans from the plan on the date the loan is made, or (b) one-half the present value of the nonforfeitable accrued benefit of the participant or, if greater, the total accrued benefit up to $10,000. For the purpose of the above limitation, all loans from all plans of the employer and other members of a group of employers described in IRC 414(b), 414(c), 414(m) or 414(o) are aggregated. Furthermore, any loan shall by its terms require that repayment (principal and interest) be amortized in level payments, not less frequently than quarterly, over a period not extending beyond five years from the date of the loan, unless such loan is used to acquire a dwelling unit which within a reasonable time (determined at the time the loan is made) will be used as the principal residence of the participant. An assignment or pledge of any portion of the participant's interest in the plan and a loan, pledge, or assignment with respect to any insurance contract purchased under the plan, will be treated as a loan under this paragraph.

(Note to reviewer: Section 108 of the SECURE Act modifies IRC 72(p) by prohibiting

loans through credit cards and other similar arrangements, effective for loans made after December 20, 2019. Plan language enabling loans through credit cards or another similar arrangement should be removed.)

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